nep-tra New Economics Papers
on Transition Economics
Issue of 2005‒09‒11
sixteen papers chosen by
Tono Sanchez
Universitat de Valencia

  1. A PHILLIPS CURVE FOR CHINA By Joerg Scheibe; David Vines
  2. Human capital and political business cycles By Akhmedov Akhmed
  3. Estimation of individual demand for alcohol By Andrienko Yury; Nemtsov Aleksandr
  4. Case Study of China’s Commercial Pork Value Chain, A By Fabiosa, Jacinto F.; Hu, Dinghuan; Fang, Cheng
  5. Did Political Constraints Bind During Transition? Evidence from Czech Elections 1990-2002 By Orla Doyle; Patrick Paul Walsh
  6. Integration and Transition – Vietnam, Cambodia and Lao PDR By Suiwah Leung; Vo Tri Thanh; Kem Reat Viseth
  7. Why is capital flowing out of China? By Christer Ljungwall; Steven Wang
  8. Does Foreign Bank Entry Reduce Small Firms' Access to Credit? Evidence from European Transition Economies By Ralph de Haas; Ilko Naaborg
  9. Wake Up and Smell the Ginseng: The Rise of Incremental Innovation in Low-Wage Countries By Diego Puga; Daniel Trefler
  10. How Much Does Investment Drive Economic Growth in China? By Duo Qin; Marie Anne Cagas; Pilipinas Quising; Xin-Hua He
  11. Market Reform, Productivity and Efficiency in Vietnamese Rice Production By Tom Kompas
  12. Incentives from exchange rate regimes in an institutional context By Ashima Goyal
  14. Internal Capital Markets in Multinational Banks: Implications for European Transition Countries By Ralph de Haas; Ilko Naaborg
  15. Increasing role of foreign capital in Polish economy since 1993 By Pawlik, Konrad
  16. Changing wage structure and education in Vietnam 1993-1998: The roles of demand By Amy Y.C. Liu

  1. By: Joerg Scheibe; David Vines
    Abstract: This paper models Chinese inflation using an output gap Phillips curve. Inflation modelling for the world's sixth largest economy is a still under-researched topic. We estimate a partially forward-looking Phillips curve as well as traditional backward-looking Phillips curves. Using quarterly data from 1988 to 2002, we estimate a vertical long-run Phillips curve for China and show that the output gap, the exchange rate, and inflation expectations play important roles in explaining inflation. We adjust for structural change in the economy where possible and estimate regressions for rolling sample windows in order to test for and uncover gradual structural change. We evaluate a number of alternative output gap estimates and find that output gaps which are derived from prodcution function estimations for the Chinese economy are of more use in estimating a Phillips curve than output gaps derived from simple statistical trends. Partially forward-looking Phillips curves provide a better fit than backward-looking ones. The identification of a non-increasing exchange rate effect on inlation during a period of large import growth hints at increased pricing to market behaviour by importers. This result is relevant to policies regarding possible exchange rate liberalisation in China.
    JEL: E12 E31 E32
    Date: 2005–02
  2. By: Akhmedov Akhmed
    Abstract: In this project, we propose an alternative explanation of the phenomenon of political business cycles — human capital of government. We propose an illustrative model in the framework of term limits. The predictions of the model will be tested on the basis of fiscal and monthly economic performance data of Russian regions from 1996 to 2003.
  3. By: Andrienko Yury; Nemtsov Aleksandr
    Abstract: Using individual data from RLMS, the longitudinal survey of the representative sample of the Russian population, we study static and dynamic models of demand for alcohol. We show the demand curve has traditional negative slope for any type of alcoholic drink: vodka, beer, and wine. We find substitution of moonshine for vodka with higher price on vodka and between vodka&beer with higher price on one of them. As a result of substitution vodka price has no impact on total ethanol consumption, while higher price on beer and wine reduce demand for ethanol. We also demonstrate that income has important effect on demand for alcoholic drinks. Risk to be drinker is rising with individual income. Higher income results in lower consumption of moonshine and in higher consumption of vodka, beer, and wine.
    Keywords: Russia, alcohol, demand.
    JEL: I1 I18
    Date: 2005–09–08
  4. By: Fabiosa, Jacinto F.; Hu, Dinghuan; Fang, Cheng
    Abstract: In China, with the cost of improved technology rising, surplus labor shrinking, and demand for food quality and safety increasing, it will be just a matter of time before the country’s hog production sector will be commercialized like that of developed countries. However, even if China’s cost of production converges to international levels, as shown in this case study, China may continue to retain some competitive advantage because of the labor-intensive nature of the marketing services involved in hog processing and meat distribution. The supply of variety meats offers the most promising market opportunity for foreign suppliers in China. The market may open further if the tariff rate for variety meats is reduced from 20% and harmonized with the pork muscle meat rate of 12%, and if the value-added tax of 13% is applied equally to both imported and domestic products. The fast-growing Western-style family restaurant and higher-end dining sector is another market opportunity for high-quality imported pork.
    Keywords: commercial, cost structure, imports, pork value chain.
    Date: 2005–08–23
  5. By: Orla Doyle (University College Dublin); Patrick Paul Walsh (Trinity College Dublin and IZA Bonn)
    Abstract: Many theoretical models of transition are driven by the assumption that economic decision making is subject to political constraints. In this paper we empirically test whether the winners and losers of economic reform determined voting behaviour in the first five national elections in the Czech Republic. We propose that voters, taking stock of endowments from the planning era, could predict whether they would become "winners" or "losers" of transition. Using survey data we measure the percentage of individuals by region who were "afraid" and "not afraid" of economic reform in 1990. We define the former as potential "winners" who should vote for pro-reform parties, while latter are potential "losers" who should support leftwing parties. Using national election results and regional economic indicators, we demonstrate that there is persistence in support for pro-reform and communist parties driven by prospective voting based on initial conditions in 1990. As a result, we show that regional unemployment rates in 2002 are good predictors of regional voting patterns in 1990.
    Keywords: political constraints, prospective economic voting, initial conditions
    JEL: D72 E24 E61
    Date: 2005–07
  6. By: Suiwah Leung (Asia Pacific School of Economics and Government,Australian National University.); Vo Tri Thanh (CIEM); Kem Reat Viseth (NIM)
    Abstract: Coming out of French colonial rule and central planning, the three transitional economies of Indochina, Vietnam, Cambodia and Lao PDR, embarked on market-oriented reforms in the late 1980s and early 1990s. Vietnam was certainly the most successful, but all three countries quickly achieved macroeconomic stability and rapid growth. However, the Asian financial crisis in 1997/98, as well as the countries’ use of administrative edicts in response to the crisis, highlights the fragile nature of their transition. The paper holds as a premise that effective integration of the three Indochina economies with the “old ASEANS” involves the former developing market institutions that can sustain “quality” growth which will take them out of the transitional economy status. It finds that, although the three economies are open to international trade and investment flows, their domestic market structures are still very much under-developed, with heavy protection of the state sector in terms of tariff structures and bank credits, and inadequate legal and judiciary developments. As a result, foreign investment flows which went principally into the state-owned enterprises in Vietnam and Lao PDR, and into the quota-dependent garment sector in Cambodia, peaked in the mid-1990s and have been declining ever since. Private sector developments have been retarded, and the process of building a commercial/legal infrastructure to support private enterprise has only just begun. Meanwhile, modern production technologies and processes involving component manufacturing in different countries and then assembly in yet a third country (the so-called “component production and assembly within integrated production systems”) means that the cost of doing business includes not just labour cost but also cost of services such as transport, telecommunication, electricity, insurance and banking. The latter are high cost industries dominated chiefly by SOEs in Vietnam and Lao PDR. The bilateral agreements already in place and the WTO agreements (when negotiated) will set deadlines for the three countries to open their service sectors to entry by international firms. Competition has, and will continue, to drive down prices for these services, thereby benefiting the domestic private sector as well as improving competitiveness for foreign direct investments. Implementation of the international trade agreements will also help to streamline cumbersome laws and regulations as well as improve the judiciary in the three countries, again with significant benefits for the domestic private sector. An important challenge is to develop the necessary human resources to complement the countries’ public administration reform. Another challenge is to maintain macroeconomic stability whilst opening the countries’ domestic and external financial sectors. A third challenge for the “New ASEANs” is to counter protectionism of the developed countries with whom they enter trade agreements.
    Keywords: integration, transition, Vietnam, Cambodia, Lao PDR, growth, macroeconomic stability, ASEAN, foreign direct investment, garment sector, infrastructure, private sector, FDI, competition, protectionism
    JEL: P27 F36 F15 F13 O53
    Date: 2005–01
  7. By: Christer Ljungwall (China Centre for Economic Research at Peking University); Steven Wang (Department of Economics and statistics, Goteborg University)
    Abstract: This paper uses quarterly balance of payment data over the years 1993:1 - 2003:4 to explore the determinants of Chin's capital flight. The long run relationship and dynamic interactions among the variables are examined using cointegration and innovation accounting methodology. The result that capital flight is stimulated by external debts growth is noteworthy. The 'Holy Trinity' exlpains the link: For the agents in Chian, when the authorities insist in keeping a rgidly pegged CNY excahnge rate and monetary policy autonomy, incurring external debts is a ready challenge for large-scale cpaital inflows and outflows. As the country's external debts are state-guaranteed, the 'revolving-door syndrome' intensifies debtors moral hazard in expecting a government bail-out, and they over-borrow from abroad; hence there is an incident of capital flight. Despite China's strict control of its fiancial account, capital flight happens, and it is defacto being funded by increasing external debts. Hence, reforms in external debts management and fiscal resource allocation should be introduced to downsize such capital flight.
    Keywords: capital flight, cointegration, China
    JEL: F21 G15 F32
    Date: 2004–01
  8. By: Ralph de Haas; Ilko Naaborg
    Abstract: On the basis of focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States, the development of small-business lending by foreign banks is analysed. Our approach allows us to complement the standard empirical literature, which has difficulty in analysing qualitative issues such as the role of changing lending technologies. It is found that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets.
    Keywords: foreign banks; transition economies; small-business lending
    JEL: F23 F36 G21
    Date: 2005–08
  9. By: Diego Puga; Daniel Trefler
    Abstract: Increasingly, a small number of low-wage countries such as China and India are involved in innovation -- not `big ideas' innovation, but the constant incremental innovations needed to stay ahead in business. We provide some evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. We explain why levels of involvement in innovation vary across low-wage countries and even across firms within each low-wage country. We then draw out implications for the location of production, trade, capital flows, earnings and living standards.
    JEL: F1
    Date: 2005–08
  10. By: Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank); Pilipinas Quising (Asian Development Bank); Xin-Hua He (Chinese Academy of Social Sciences)
    Abstract: Investment-driven growth has long been regarded as a key development strategy in China. This paper investigates empirically the validity of this view. Post-1990 data analyses and macroeconometric model simulations show that market demand has become a regular force in driving investment since reforms, that non-demand-driven investment growth contributes to increasing capital-output ratio far more than output growth, that government investment exerts a pivotal role in amplifying investment cycles, albeit effective in promoting employment, and that delayed and rising consumption from current investment surge can help sustain the impact of growth even with constant-returns-to-scale in the long-run GDP.
    Keywords: Investment, Growth, Impulse response function, Cointegration, Granger non-causality
    JEL: E22 E62 R34 O23 P41
    Date: 2005–08
  11. By: Tom Kompas (Asia Pacific School of Economics and Government,Australian National University.)
    Abstract: This paper analyzes the dramatic increases in rice output and productivity in Vietnam due largely to market reform, inducing farmers to work harder and use land more efficiently. The reform process is captured through changes in effort variables and a decomposition of total factor productivity (TFP) due to enhanced incentives for two main reform periods: output contracts (1981-87) and trade liberalization (1988-94). The results show that the more extensive is market reform the larger the increase in TFP and the share of TFP growth due to incentive effects, suggesting that more competitive markets and secure property rights matter greatly. However, in the post-reform period (1995-99), the incentive component of TFP dissipates as a result of falls in the price of rice and slow increases in input prices, especially for hired labour, fertilizer and capital. A stochastic production frontier is estimated to determine what farm-specific factors limit efficiency gains. Results show that farms in the main rice growing regions, those with larger farm size and farms with a higher proportion of rice land ploughed by tractor are more efficient, suggesting the need for additional reforms to augment productvity. In particular, the requirement that rice be grown in every province in Vietnam, restrictions on farm size (especially in the north) and the slow development of rural credit markets for capital and land are seen to restrict the level and growth of efficiency substantially.
    Keywords: market reform, total factor productivity, efficiency, rice production
    JEL: O13 O47 Q10
    Date: 2004–04
  12. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: In a simple open EME macromodel, calibrated to the typical institutions and shocks of a densely populated emerging market economy, a monetary stimulus preceding a temporary supply shock can lower interest rates, raise output, appreciate exchange rates, and lower inflation. Simulations generalize the analytic result with regressions validating the parameter values. Under correct incentives, such as provided by a middling exchange rate regime, which imparts limited volatility to the nominal exchange rate around a trend competitive rate, forex traders support the policy. The policy is compatible with political constraints and policy objectives, but analysis of strategic interactions brings out cases where optimal policy will not be chosen. Supporting institutions are required to coordinate monetary, fiscal policy and markets to the optimal equilibrium. The analysis contributes to understanding the key issues for countries such as India and China that need to deepen markets in order to move to more flexible exchange rate regimes.
    Keywords: Exchange rate, hedging, supply shocks, EMEs, incentives, politics
    JEL: F31 F41
    Date: 2005–07
  13. By: Jesus Felipe
    Abstract: This comment raises three main issues about He and Qin's (2004)attempt at modeling investment in the PRC. The first is this author's skepticism about the general applicability of the neoclassical model of investment to the PRC. Second, that their model for business investment, based on the neoclassical theory of investment, can be viewed as an approximation to an accounting identity derived by manipulating two other identities, namely, that of the capital share in output, and that of the motion of the capital stock. It is shown that the difference between He and Qin's equation and the identity is simply yhat they use the rental price of capital, while the identity relies on the profit rate. At best, all their analysis would indicate is that rental price of capital and profit rate are different. It is also argued that the empirical results are not clearly related to the supposed theoretical model. Based on this, the conclusion is that the policy implications of He and Qin's alleged model are somewhat dubious. Third, He and Qin's equation for government investment introduces the deviations of output from the long-run trend as an explanatory variable, estimated using an aggregate production function. The problems underlying this latter concept make the estimation of the output trend using this method a questionable exercise. Also, the empirical results suffer from serious problems of interpretation.
    Date: 2005–08
  14. By: Ralph de Haas; Ilko Naaborg
    Abstract: We use focused interviews with bank managers to analyse how multinational banks use internal capital markets to control their subsidiaries. It is found that foreign bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. Parent banks generally set credit growth targets, which may then be supported by book capital and debt funding. This passive approach establishes a minimum amount of local book capital and is driven by regulatory considerations. In addition, some banks have started to use semi-active economic capital models. By charging subsidiaries for the use of economic capital, parent banks introduce a constraint at the individual loan level. This bottom-up approach determines the pace at which subsidiaries are able to meet their credit growth targets. Our findings suggest that the credit growth of subsidiaries may critically depend on the financial position of the parent bank.
    Keywords: foreign banks; transition economies; internal capital markets
    JEL: F23 F36 G21 G31 G32
    Date: 2005–08
  15. By: Pawlik, Konrad (Department of Organisation and Management, Aarhus School of Business)
    Abstract: The regional integration and increasing role of the Central European Countries in globalization <p> processes raised the question of foreign direct investments inflow and its role in these Economies. <p> Poland, the first country that launched radical reforms and the largest country that joined recently <p> the European Union, pays special attention of the researchers in international economics and <p> business. This paper is introductory article opening up dissertation on technology transfer and <p> absorption to foreign affiliates in Poland in the years: 1993-2002. The paper carries out an analysis <p> of foreign companies and its role in different industries with regard to ownership control, <p> performance, and technology: transfer, absorption and complexity. The entire results are aggregated <p> and confronted in the comparative analysis with domestic private- and public- companies. The results <p> confirm significant increase of foreign control over their affiliates as well as the Polish market in <p> general. This implies larger amount of new greenfield investments that are mostly wholly owned <p> subsidiaries as well as using knowledge based view or transaction cost argumentation that there is <p> increasing transfer of tacit knowledge. Foreign companies invest more and implement more advanced <p> technical solutions than their domestic counterparts. Labour productivity and compensation per <p> employee are higher in foreign companies than in domestic firms, suggesting that employees in <p> foreign affiliates are more efficient, improving and absorbing new skills. Trends for profitability are <p> similar for domestic private companies, however foreign companies have the profits trend line flatter. <p> Foreign and intra-industry affiliates trade figures suggest growth in both aspects. The results <p> presented in this paper have clear policy implications for targeting of promotion activities to attract <p> FDI into Transition economies. Moreover, the paper open up the research ”box” for more profound <p> econometrical analysis that will be continued in the incoming dissertational articles.
    Keywords: Foreign capital; FDI; Polish Economy; technology; R&D activity; innovation
    Date: 2005–09–02
  16. By: Amy Y.C. Liu (National Centre for Development Studies, Australian National University)
    Abstract: This paper examines the changes in relative earnings of workers with different education levels during Vietnam’s transition. It is found that females enjoy a higher return to education than males do in 1998, reversing the situation observed five years ago. A large fall in the returns to vocational training for males, amid the rapid growth in the representation of better-educated females in the private sector where education is valued higher could be responsible for what have occurred. A direct assessment of the role of demand using a simple demand and supply framework developed by Katz-Murphy (1992) is undertaken. The result suggests an increase in the relative demand for better-educated workers appears to play an important role in explaining the earnings differentials between workers of different education groups. Education reform to better suit the needs of the post-reform emerging market, on-the-job training for workers, as well as equal access to education are some policy options that hold the key to reduce wage inequality between different education groups.
    Keywords: returns to education, Vietnam, wage structure
    JEL: I21 J31 P2
    Date: 2005–04

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